Myths about investing in mutual funds

Mutual fund investment plans reduce your risk but don’t eliminate it. Investing in SIPs is safe but not risk-free. As much as the Indian mutual fund industry has grown to an AUM of $500 billion, the myths about mutual funds still abound. Here are 10 popular mutual fund myths and the actual facts that you should know.

The Myth: You need a lot of capital to invest in mutual funds

That is far from the truth. You can invest in a mutual fund NFO or an ongoing mutual fund scheme with Rs. 5,000. If you opt for SIP, you can start with Rs. 500. You don’t need a lump-sum amount to invest in mutual funds. This is an ideal investment vehicle for you to start investing small and watch your money grow. Mutual funds are a genuinely mass product.

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The Myth: I have equities, so I don’t need mutual funds

If you have a portfolio of equities, it is well. Direct equities are not well equipped to help you save and plan for your long-term goals. That’s why equity mutual funds are best left to equity mutual funds. Equity funds give you a wider choice and the benefits of fractional ownership, something you don’t get in equity. Even if you have an equity portfolio, it always makes sense to top it up with a mutual fund portfolio.

The Myth: It is best to choose the fund that gives the highest returns

The Truth: You cannot just go by returns. Let us look at an analogy. Which is better if fund A generates 18% and Fund B generates 16%? The answer is Fund A. Now, if you are told that Fund A generated 18% with 50% volatility and Fund B generated 16% with 10% volatility, which would you prefer? Obviously, in risk-adjusted terms, Fund B now looks better. There is no point in buying a fund where the fund manager takes unnecessary risk for higher returns. We all know that it can backfire!

The Myth: I have a Mutual Fund SIP, so I don’t have to worry about the risk

The Truth: SIP or a systematic investment plan is convenient to get the advantage of rupee cost averaging. It has been observed that SIPs work best over the long run. If you evaluate a SIP during a rising market, then a lump sum investment would have done better. The SIP does not address the risk of relative underperformance compared to peers or the benchmark index.

The Myth: I need to be an expert in stock markets to invest in mutual funds

The Truth: Firstly, mutual funds are not only about equity but also other products like debt, liquid funds, gold etc. To invest in mutual funds, you don’t need to understand the nuances of the stock market. That is why you opt for mutual funds, as you want an expert to take these decisions. You still need to understand how to evaluate a fund, monitor your mutual funds etc. There is no need to be an expert in the stock markets to invest in mutual funds.

The Myth: Mutual Funds are almost like guaranteed return assets

The Truth: In fact, mutual funds are subject to market risk, which is something even AMFI keeps telling you repeatedly. Mutual funds are market products, so the returns are also market linked. Leave alone equity funds; even debt funds carry market risk. There is no concept of assured returns or guaranteed even in government bond funds. All mutual funds are subject to market, interest rate, and macro risks. It is just that mutual funds have experienced fund managers to manage risk better.

The Myth: I always prefer funds with low NAVs

The Truth: In reality, the level of NAV does not matter. In the case of an equity fund, the timing of your entry does matter. For example, if you enter equity funds when the stock market is at a bottom, it does not matter whether the fund has a NAV of Rs10 or Rs1,000. You will still see capital appreciation from the low levels of the stock market. That is like a penny stock is more attractive than a Sensex stock, just because it is available under Rs10. So the level of NAV hardly matters to your decision.

The Myth: I love mutual funds because I leave everything to the fund manager

The Truth: When it comes to your portfolio, you are the leader. As a leader, you can delegate everything except the job of being a leader. You still need to track your fund, its portfolio, its risk and its performance versus peers and the benchmark. You need consistent performance, and if you don’t find that happening, just think with your feet and look for an alternative fund. Don’t put your money at the mercy of the fund manager. When it comes to your mutual fund portfolio, the buck still stops with you.

The Myth: I need regular income, so I prefer the dividend option

Even if you need a steady income, you don’t need to opt for a dividend option. You can have a growth plan and design a systematic withdrawal plan (SWP) that will draw down your corpus over a while. The SWP will be more value accretive and tax efficient than a dividend plan. You can have a growth option and still get regular income using SWPs.

The Myth: Index ETFs are meaningless as they cannot beat the index

The Truth: You would be surprised to know that 80 to 85% of fund managers fail to beat the index globally. By purchasing an index fund or an index ETF, you are still better than that 85%. India is also reaching a stage where fund managers struggle to beat the index consistently. Remember, the Sensex has grown from 100 to 60,000 over the last 40 years. That is annualised returns of 16.5% without dividends and 18% with dividends. So yes, index investing can be profitable and very low on cost.